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Take cover: Getting protection from trade war fallout

“It will get worse before it gets better.” Canadian businesses must prepare for the escalation of the trade war.

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As tensions grow between the United States and China, Canada is "caught in the crossfire," according to an expert on trade law.  

"My view on it is that the U.S. and China are in a trade war," says Cyndee Todgham Cherniak, founder of LexSage Professional Corporation. "We are in a stage of history where we don't fight all wars with guns and tanks. The U.S. is at war with China and other countries, like Canada, are caught in the middle."

United States President Donald Trump has taken the position that "China's advancement will come at the detriment of U.S. jobs and U.S. companies," says Todgham Cherniak, who warns that Canadian companies should take steps to protect themselves from the fallout of the trade war.

The dispute between the two international superpowers made headlines late last year with the arrest of Huawei Technologies Co. Ltd. chief financial officer Meng Wanzhou on fraud charges.

The fraud charges against Huawei centre on the technology giant's involvement with telecommunications equipment seller Skycom Tech. Co. Ltd. and Canicula Holdings Ltd. The U.S.  alleges that Huawei had control of Skycom, which it used to sell telecommunications equipment to Iran in violation of U.S. sanctions.

The Chinese telecommunications executive was arrested in Vancouver at the request of the United States during a layover on a flight from China to Mexico. Meng remains in Vancouver under house arrest awaiting extradition hearings.

Canada's involvement has greatly angered China and prompted retaliation. Two Canadians have been arrested in China for alleged national security breaches since December, and a third, who had already been tried and sentenced to 15 years for drug smuggling, is now facing a death sentence following a quick retrial. Todgham Cherniak also cites examples of Chinese automobile companies cancelling their planned expansion into Canada and Chinese boycotts of Canadian products such as luxury jacket company Canada Goose.

"They're saying Canada is a terrible country because we arrested Ms. Meng," she says. "Canadian companies are caught in the crossfire through no fault of their own."

China's boycott of Canadian goods is likely not a concern for the United States, says Todgham Cherniak. "They really do not want Canadians to develop relationships with Chinese buyers and importers that would possibly replace the U.S. source while this trade war is going on."

Todgham Cherniak, who is based in Toronto, describes the economic sanctions as one of the "four prongs" of economic warfare between China and the United States, which also effect Canada.

The second, she says, is U.S. tariffs on steel and aluminum – triggered by the American concerns of overproduction in China.

"Since cheaper steel is available on the world market, U.S. steel companies have gone out of business and steelworkers lost their jobs. So Trump wants to bring back the steel companies, he wants to bring back the aluminum companies. He wants to protect steel and aluminum jobs," she says.

Steel tariffs have major ramifications for Canada, which exports almost 90 per cent of its steel to the United States, according to the Canadian Steel Producers Association. A study by the Peterson Institute for International Economics found that this could cost the Canadian economy $4.2 billion a year.

The third prong proposed by Todgham Cherniak is the Section 301 tariffs, which target a variety of Chinese-made goods.

The tariff was initially 10 per cent on a list of certain goods before the United States increased the scope of goods subject to the tariff and then increased the tariff to 25 per cent.

"Since tariffs are increased on goods coming into the U.S., they're more expensive and Americans won't buy the Chinese goods they'll look for U.S. alternatives, which will result in increased production, which will result in U.S. manufacturing jobs, which will have secondary effects within the U.S. market," explains Todgham Cherniak.

"And if Canadian goods are caught in the crossfire and Canadian companies go out of business, Trump is seems to think: 'We are really interested in U.S. jobs and so what about Canada,'" she adds.

Todgham Cherniak describes the fourth prong as the "technology transfer issue."

"U.S. companies are getting their intellectual property stolen by China. And that's not allowed, but it's being done and it's being done blatantly," she says. "The U.S. wants to stop that from happening."

The trade war should be "something that we are nervous about," says Todgham Cherniak.

As an example, she says that Canadian companies selling goods to the United States should be aware that country could claim that the good was actually produced in China – “How do we know this wasn't made in China and someone just put a Canadian flag on it?” – or vice versa.

"Sometimes it's really hard to prove the origin of goods," says Todgham Cherniak. "We are going to have these documentary requirements to prove to either China or the U.S. that these are Canadian-made goods."

She recommends that Canadian companies go "back to basics" to ensure that they are complying with all regulations and doing thorough due diligence to ensure that Canadian-made goods will be accepted for import into Chinese and American markets.

"We need to ask ourselves: Are we doing everything we need to do to make sure that our goods get to our customers without any problems?" she says.

She also recommends that Canadian companies avoid sending employees to China, especially if they take a computer full of company information, which may be seized by the Chinese government.

"And don't send your top people because they are higher-stakes targets," she warns.

Todgham Cherniak also recommends that Canadians prepare for the escalation of the trade war. “It will get worse before it gets better."